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Courtney, Larson Receive Tax Clarification from the IRS for Homeowners with Crumbling Foundations

October 16, 2018

Press Release

(Hartford, CT) – Today, Congressman Joe Courtney (CT-02) and Congressman John B. Larson (CT-01) announced that the Internal Revenue Service (IRS) had provided them with clarifying information that will offer additional tax relief to homeowners with crumbling foundations. First, the IRS has announced that they will allow homeowners to “carry forward” or “carry back” a net operating loss should their casualty loss exceed their annual tax liability. This clarification means that even if the net loss suffered by a homeowner exceeds their annual federal tax liability, they can carry forward that loss for up to 20 years.

Second, the IRS has clarified that homeowners can claim up to 100% of their annual tax liability against their casualty loss, despite the GOP tax law that was signed in December 2017 and limited claims to 80%. Finally, the IRS will allow taxpayers with a net operating loss to “carry back” their losses for two years – a provision that the GOP tax law had eliminated as well.

“Today, the federal government has once again said ‘yes’ to helping homeowners struggling with the cost and damage of crumbling foundations. This clarification of the tax revenue procedure that we announced last year is going to have significant implications for middle-class homeowners whose repair costs exceed their annual income,” said Courtney and Larson. “It also builds on the critical development we announced last year that the IRS would allow homeowners to claim a casualty loss on their 2017 return to recoup the costs of repairing a home foundation.

“We are grateful for the continued attention of the IRS and Treasury Department to this crisis in Connecticut, and the support they have provided today to homeowners struggling with the damage caused by crumbling foundations. Also, we are grateful to have had the support of the Connecticut Society of Certified Public Accountants and their Executive Director, Bonnie Stewart, in this effort.”

In August, Courtney and Larson sent a letter to the IRS, requesting information on how a homeowner with a crumbling foundation who was eligible for a “casualty loss” deduction could carry that deduction back, or carry it forward after the GOP tax law changed the criteria for taking this sort of a loss.

Bonnie Stewart, Executive Director of the Connecticut Society of Certified Public Accountants (CTCPA), wrote in a letter of support for Courtney and Larson’s request to the IRS, that, “Simply stated, in the vast majority of cases, the cost of repairing a crumbling foundation will far exceed the amount of taxes a homeowner will pay in a given year. Thus, the taxpayer would not be able to deduct the total amount of their crumbling foundations casualty loss. Granting a new net loss carryforward in these cases would provide homeowners with the ability to deduct their loses over a specified period. “

Specifically, the members requested technical clarification on how or whether a taxpayer could carry forward a net operating loss if their casualty loss exceeded their income.

The GOP tax law changed the parameters for both casualty losses and net operating losses, and Courtney and Larson had previously worked with the IRS to protect homeowners with crumbling foundations from the negative effects of the new tax law. In February of 2018, the IRS provided clarification allowing crumbling foundations homeowners safe harbor, so that they could still take a crumbling foundations casualty loss deduction, even though the GOP tax law eliminated casualty loss deductions for all situations except for Presidentially-declared disasters.

In addition, the law restricted the Net Operating Loss, so that taxpayers would not be able to “carry back” a Net Operating Loss and could only use a loss to offset 80% of their taxable income in a given year. However, as a result of the letters sent to IRS from Courtney and Larson, as well as support from the Connecticut Society of Certified Public Accountants (CTCPAs), the IRS finally released information allowing crumbling foundations homeowners to take a Net Operating Loss, carry it forward for twenty years, carry it back for two years, and use the loss to offset the full 100% of their taxable income in a given carryback or carryforward year.

This was an organic process that followed from the release of the original Revenue Procedure from the IRS, through feedback from the tax preparer community and meetings with homeowners throughout Connecticut. Prior to the release of this information, Courtney and Larson were concerned that taxpayers with more modest incomes would not be able to benefit fully from the casualty loss deduction. The information from the IRS is a huge victory for all homeowners with crumbling foundations, especially those with lower incomes – and will allow these homeowners to receive federal tax assistance for up to twenty years.

Homeowners should consult with a qualified tax preparer to see if they qualify for this deduction.

Last November, the IRS issued Rev. Proc. 2017-60 to enact a “safe harbor” for the treatment of crumbling foundation-related repair costs as a “casualty loss” deduction from a taxpayer's taxable income under Section 165 of the Internal Revenue Code.

The Republican tax-overhaul signed into law in December, temporarily limits the applicability of Section 165. Under the law, beginning in tax year 2018 only taxpayers who suffer damage related to a presidentially-declared Stafford Act disaster may deduct their property-casualty losses. This provision expires in 2025.

In a December 21, 2017 letter to Courtney and Larson, the IRS confirmed that homeowners who had already completed repairs to their home before the end of 2017 would be able to claim the costs on their federal tax returns for 2017, or any open prior year.

Taxpayers have three years from the date they filed their original tax return to file Form 1040X to amend their return (and claim this deduction). The updated revenue procedure extends the “safe harbor” through the period that 2017 returns can be amended, expected to be the filing season in spring of 2021.

As homeowners and tax preparers have put the deduction to use, questions have arisen regarding how to address situations where taking the casualty loss deduction would exceed a homeowner’s income, known as a “net operating loss.” Given the high cost of repairing a failing foundation, the potential net operating loss could be substantial, and this clarification would determine whether a taxpayer could carry forward this loss in future tax years, which could further alleviate the financial strain of replacing a crumbling foundations.

Homeowners should consult with a qualified tax preparer to see if they qualify for this deduction